The role of public sector in economic performance : theoretical analyses of the effect of fiscal policies on long-run growth with a self-interested government & empirical study of the economic relationship between the government and non-government sectors in China

This thesis responds to the development policy debate on whether the popular Beijing Consensus is an alternative, especially for developing countries, to the Washington Consensus of market-friendly policies. The advocates of the Beijing Consensus have overlooked the facts that China’s development model has much in common with the Washington Consensus, China has profited from the globalisation, and the reform for establishing a market-oriented economy is the key factor of the rapid development and outstanding achievements in China. The critics have reluctantly acknowledged the successful strategies employed by the policy makers in Beijing, however, they branded China as an authoritarian country, and are wilfully or unintentionally blind to the diversity, inclusiveness and competitiveness in the ‘quasi-nonpartisan’ Chinese political system. This thesis explain how a farsighted government can increase long-run growth by fiscal policies, why free market and the ambitious government are not contradictory in China, and why so many ‘democratic’ countries violate the first two prescriptions of the Washington Consensus: fiscal discipline, and public expenditure priority to pro-growth investment. The theoretical analyses show that the strategy of a farsighted government is to sacrifice the first several generations but benefit all future generations through cutting nonproductive public spending and giving expenditure priority to productivity-enhancing expenditure, so that a higher growth rate leads to a ‘quasi-Pareto improvement’ among generations. Nevertheless, farsighted fiscal policy together with ‘hedonistic citizens’ has a side effect, the welfare loss for both the government and the citizens. The Barro model is an exception in which a farsighted government has no place to increase the growth rate because welfare maximisation equals growth maximisation. The empirical results reveal the strong substitution relationship between the government and nongovernment capital, and thus the general CES technology rather than the Cobb-Douglas technology is the suitable structure containing the two types of capital in the production function. However, the government capital has become more complementary to the nongovernment capital due to the deepening reforms of SOEs and fiscal policies since 1992.